As Chinese economy matures, Beijing is adapting and enacting reforms to bolster the markets and country-related exchange traded funds.
On the recent webcast, Deciphering Asia: Pinpointing Potential Opportunities, Michael Jones, Chairman and Chief Investment Officer at RiverFront Investment Group, explains that China has been following the Asian Development Model of growth that helped lift millions out of poverty. However, like Japan witnessed, the model may lead to excessive debt and economic stagnation.
Jones, though, argues that China has a plan to beat the so-called Japan syndrome of slow growth, pointing to aggressive economic reforms that could help China become an attractive place to invest.
“With reforms to support private companies, liberalize markets and open the financial sector, the Chinese government intends to boost the market economy and strengthen the drivers of economic growth,” according to Deutsche Asset & Wealth Management.
While China has been following an export-oriented economic model, Anson Chow, Vice President of Passive Asset Management for Asia Pacific at Deutsche Asset & Wealth management, and Peng Wah Choy, Vice Chairman and CEO of Harvest Global Investments Limited, point out that the Chinese government has begun bolstering domestic consumption, liberalizing markets and opening the financial sector to fuel further growth.
“Consider state-owned enterprise reform, which may expedite given tighter local government fiscal conditions and their ambitious securitization targets,” according to DeAWM. “China’s grand ‘One Belt and One Road’ initiative will bring more infrastructure projects, benefiting related construction materials, machinery, railway and utilities projects, and such. In regard to financial reform, further interest-rate liberalization bodes ill for bank earnings; brokers are set to benefit from capital market reform and the potential Shanghai Hong Kong Stock Connect. Finally, land and Hukou reform is a critical and long-term step to improve China’s growth potential.”
Meanwhile, increased urbanization will add to continued consumption growth. Anson and Peng also point out that given the country’s high personal-income growth, consumption will also likely rise as well. China added 13.2 million urban jobs last year. Additionally, consumption rose 3% to 51.2% in 2014 and reached 58.4% in Q3 2015.
While China’s economy has experienced some growing pains lately, Deutsche Bank research projects Chinese gross domestic product to rise up toward 7.2% in the fourth quarter, anticipating stronger fiscal stimulus in the coming months to boost growth.
Many investors have been able to gain exposure to potential growth opportunities in China through country-specific ETFs. However, China remains underrepresented in global portfolios. Specifically, foreign ownership as a percentage of domestic markets is only 1.5% of mainland China securities and 11.4% of China including securities listed overseas.